Inflation dropped to 2 percent in the UK, when will the BoE cut interest rates?

According to the IKON Securities evening bulletin, although the headline annual inflation in the UK reached 2% for the first time since 2021, the possibility of an earlier interest rate cut has decreased slightly. This is a situation caused by persistently high data in core inflation and, more specifically, services inflation. The general expectation is that the first interest rate cut will occur in August.

Although the inflation information coming from England in the morning attracted attention as economic information, it did not have much of an impact on Sterling before the Bank of England meeting tomorrow.

Due to the Juneteenth holiday in the USA, agricultural commodities will be closed, while US futures stock market indices, precious metals and commodity classes will close early. The US stock market will be closed.

Details of UK inflation

UK – Core CPI (monthly): 0.5% (Previous: 0.9%)

UK – Core CPI (annual): 3.5% (Expected: 3.5%; Previous: 3.9%)

UK – CPI (monthly): 0.3% (Expected: 0.4%; Previous: 0.3%)

UK – CPI (annual): 2.0% (Expected: 2.0%; Previous: 2.3%)

*There is a central bank meeting of two valuable countries tomorrow. First of all, the central bank decisions of Switzerland and then England will be followed.

When will the Bank of England cut interest rates?

According to Forex News Center, the fact that inflation in the UK returned to 2 percent after 3 years divided economists on whether the BoE will cut interest rates in August.

According to Sanjay Raja, chief economist at Deutsche Bank Research, the inflation data released in the United Kingdom contains both good and bad news and increases the possibility of an interest rate cut in August.

According to Raja, the headline inflation drop to 2% is welcome news after the rate has been above the Bank of England’s target for 33 consecutive months. However, services inflation, which is the main indicator followed by policy makers, made an upward surprise.

“The gap between the bank’s projection and the actual information has widened a bit, raising concerns that service prices may be a little more sticky than expected,” Raja said, adding that what is important for interest rates right now is how much policymakers value concrete data and that recent surveys are more encouraging about prices. He also adds to his words that

Michael Brown, senior research strategist at Pepperstone, said UK data showed inflation had returned to the Bank of England’s 2.0% target in May, but this news did not reflect the central bank’s decision on Thursday to keep the bank rate steady at 5.25%. He said it would not affect it significantly.

“Instead, the first 25 basis point cut appears expected to come in August, linked to the Bank’s updated economic bets,” Brown said. However, even if the BOE cuts back in August, it could be a divided decision among policymakers; “One or two governors may still remain alarmed about the persistence of inflation amid a tight labor market and stubbornly high services inflation,” he said.

With UK services inflation falling only slightly in May, expectations that the Bank of England will cut its key interest rate in August appear to have been further shaken, according to Ruth Gregory, deputy economist at Capital Economics.

Gregory said that although general inflation fell to the central bank’s 2.0% target, it was very disappointing that services inflation fell from 5.9% to only 5.7%.

Services inflation remains very high

“As a result, today’s announcement will not completely eliminate the bank’s concerns about permanent price pressures,” said Gregory, who continues to expect a reduction in August, but emphasized that this depends on news of better service prices and price increases in the coming months.

ING economist James Smith said that although headline inflation fell in the UK, it was services inflation that was valuable to the Bank of England, coming in higher than expected for the second month in a row in May.

Smith stated that at 5.7%, it was 0.4 points above the BOE’s forecast and that the bank confirmed that it would not change interest rates at its meeting on Thursday.

Stating that ING maintained its interest rate cut invitation in August, Smith added that the market sees the possibility of a 40% discount as very low.